Written by Steven Hansen
The December 2012 ISM non-manufacturing (aka services) index continues its 2+ year growth cycle, and improved from 54.7 to 56.1 (above 50 signals expansion). This was much better than the market forecast of 53.5 which was expecting a decline.
The economically intuitive components of this index remain in expansion territory, and is signalling the economy is not near a recession in December 2012. There are two sub-indexes in the NMI which have good correlations to the economy – the Business Activity Index and the New Orders Index – and both have good track records in spotting an incipient recession. Both are well inside expansion territory.
The Business Activity sub-index shrank marginally 0.9 points. It is in expansion territory – and remains in the middle of the range seen since the end of the recession.
ISM Services – Business Activity Sub-Index
The New Orders Index rose 1.2 points. This sub-index is in expansion territory – and is now on the high side of the range seen since the end of the recession.
ISM Services – New Orders Sub-Index
The complete ISM manufacturing and non-manufacturing survey table is below.
Econintersect does give serious consideration to this survey as the service sector accounts for 80% of the economy and 90% of employment. However, this an opinion survey and is not hard data.
From the ISM report:
Economic activity in the non-manufacturing sector grew in December for the 36th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®. “The NMI™ registered 56.1 percent in December, 1.4 percentage points higher than the 54.7 percent registered in November. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 60.3 percent, which is 0.9 percentage point lower than the 61.2 percent reported in November, reflecting growth for the 41st consecutive month. The New Orders Index increased by 1.2 percentage points to 59.3 percent. The Employment Index increased by 6 percentage points to 56.3 percent, indicating growth in employment for the fifth consecutive month at a significantly faster rate. The Prices Index decreased 0.4 percentage point to 56.6 percent, indicating prices increased at a slightly slower rate in December when compared to November. According to the NMI™, 13 non-manufacturing industries reported growth in December. Respondents’ comments remain mixed and are mostly positive about business conditions and the economy.”
INDUSTRY PERFORMANCE – The 13 non-manufacturing industries reporting growth in December — listed in order — are: Information; Construction; Retail Trade; Finance & Insurance; Public Administration; Other Services; Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Mining; Real Estate, Rental & Leasing; Health Care & Social Assistance; Utilities; and Transportation & Warehousing. The five industries reporting contraction in December are: Accommodation & Food Services; Professional, Scientific & Technical Services; Wholesale Trade; Educational Services; and Management of Companies & Support Services.
Caveats on the use of ISM Non-Manufacturing Index:
This is a survey, a quantification of opinion. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy for as long as it has been in existence. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions.
The main ISM non-manufacturing index (NMI) is so new that it does not have enough data history to have reliable certainty about how it correlates to the economy. Again, two sub-indices (business activity and new orders) do have good correlation for the limited history available.
No survey is accurate in projecting employment – and the ISM Non-Manufacturing Employment Index is no exception. Although there are some general correlation in trends if you stand far enough back from this graph, month-to-month movements have not correlated well with the BLS Service Sector Employment data.
ISM Services Employment Sub-Index vs BLS Non-Farm Services Employment